The Panic of 1857

(LoC) The major financial catalyst for the panic of 1857 was the August 24, 1857, failure of the New York branch of the Ohio Life Insurance and Trust Company. It was soon reported that the entire capital of the Trust's home office had been embezzled. What followed was one of the most severe economic crises in U.S. history.

Almost immediately, New York bankers put severe restrictions on even the most routine transactions. In turn, many people interpreted these restrictions as a sign of impending financial collapse and panicked. Individual holders of stock and of commercial paper rushed to their brokers and eagerly made deals that "a week before they would have shunned as a ruinous sacrifice." As the September 12, 1857, Harper's Weekly described the scene on the New York Stock Exchange, "…prominent stocks fell eight or ten per cent in a day, and fortunes were made and lost between ten o'clock in the morning and four of the afternoon."

The Report of the Clearinghouse Committee, produced in the years following the panic of 1857, found that "A financial panic has been likened to a malignant epidemic, which kills more by terror than by real disease." Yet behind the reaction of New York's bankers to the closing of a trust company lay a confluence of national and international events that heightened concern:

• the British withdrew capital from U.S. banks;
• grain prices fell;
• Russia undersold U.S. cotton on the open market;
• manufactured goods lay in surplus;
• railroads overbuilt and some defaulted on debts;
• land schemes and projects, dependent on new rail routes, failed.

To compound the problem, the SS Central America, a wooden-hulled steamship transporting millions of dollars in gold from the new San Francisco Mint to create a reserve for eastern banks, was caught in a hurricane and sunk in mid-September. (The vessel had aboard 581 persons—many carrying great personal wealth—and more than $1 million in commercial gold. She also bore a secret shipment of 15 tons of federal gold, valued at $20 per ounce, intended for the eastern banks.) Continued